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Stockscores.com will be participating in the Financial Forum show in Vancouver February 13th to 15th. I will provide Stockscores readers with a Promotional Code next week so that you can attend the show for free. Hope to see lots of you there.
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Stockscores.com Perspectives
For the week ending January 24, 2004
In this week's issue:
The Stockscores methodology has three basic steps. First, the stock being considered must have a Sentiment Stockscore of 60 or higher. Second, the Signal Stockscore must be above 80. Finally, the stock must have a good chart pattern. This begs the question, what is a good chart pattern?
Chart patterns are difficult to define mathematically, but quite easy to see when looking at a chart. The challenge that I had when creating the Stockscores scoring system was to create a model that was good at identifying patterns that are effective at predicting future trends. It is important to understand that we do not buy stocks because they have good Stockscores, but instead, because they have good chart patterns. Creating the two Stockscores indicators is how I solved the problem of finding good chart patterns.
When I think about the chart patterns that are effective for identifying winning stocks, there are some common themes. Whether we are talking about Asending Triangles, Head and Shoulder Bottoms, Pennants or Cup and Handles, stocks tend to begin up trends from the same chart characteristics.
The first and most important theme of good chart patterns is a break from low price volatility. The less volatile a stock is before it breaks upward, the more likely a future trend will develop. Periods of low volatility say a lot about a stock and what the market thinks about it. Consider price volatility as measure of investor uncertainty; the more uncertain the market is about what the company is worth, the more volatile the stock will be. The market is showing confidence in the value that they give a stock when the price does not change a whole lot over the recent period.
Another common theme of good chart patterns is a break through resistance. Resistance is a ceiling price that the market has not been able to move above for some time. Ideally, resistance is defined by a consistent pressuring of a price level without penetration. The more often resistance is hit, the more important it is. The resistance price level represents an upper threshold of what investors are willing to pay for the fundamentals of a company. Breaks through resistance imply either new fundamental information or a change in perception by investors.
The final important consideration of good chart patterns are an increase in volume leading in to the breakout. As investors with good information begin to hear information of improving fundamentals, they begin to accumulate the stock more aggressively and an increase in volume results. This is most notable on the breakout day.
I am often asked what the Stockscores are based on, and the answer lies in this explanation of good chart patterns. Stocks that have breaks from low volatility, through resistance with strong volume support will have good Stockscores indicators because those factors are heavily considered in the Stockscores model. The model was designed to find good chart patterns, and succeeds in highlighting these characteristics.
Should we buy every stock that has good Stockscores indicators? Absolutely not. I purchase stocks because they have good chart patterns, but use the Stockscores indicators to point my attention to the common characteristics of good charts. Combining the three rules helps us focus on high probability opportunities in the market.Back To Top
It is getting harder to find stocks that are just starting their up trends since the market has done very well over nearly the past year. This week, I decided to do a Market Scan on the NYSE which I don't often do, to find some more conservative stocks that are showing promise. I ran the Stockscores Simple Market Scan, which revealed 124 candidates. After going through the individual charts of these stocks, the following two stood out as pretty good.Back To Top
1. CBM
CBM is making a long term breakout from a period low volatility. The breakout is getting confirmation from strong volume, and the Stockscores indicators are in the right place. So long as the stock can hold above support at $24.50, I think this stock has good potential to move higher.
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2. CAM
CAM is showing a decent turnaround chart pattern, with a break Friday from a rising bottom consolidation. After a lengthy period of underperforming the overall market, it looks like this stock may now be turning around. The Sentiment Stockscore recently crossed above 60, and the Signal Stockscore has jumped upward today indicating investors are taking an interest in the stock again. Support at $46.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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